Finance Minister François-Philippe Champagne has said that employee ownership trusts are a way to help future generations carry their legacy forward.Justin Tang/The Canadian Press
A tax incentive that helps business owners sell their companies to employees without seeking outside buyers will be made permanent, giving a boost to a succession planning tool Ottawa initially introduced as a temporary measure.
The federal government’s spring economic update, released Tuesday, said that it will permanently extend a capital-gains tax exemption for employee ownership trusts, or EOTs. The measure allows qualifying owners to sell their businesses to employees through a trust and receive a tax exemption on the first $10-million of capital gains on a company sale. At top provincial tax rates, that means roughly $3.5-million in savings.
The incentive was introduced in 2024 and had been set to expire at the end of 2026, but advocates had been pushing for it to be extended.
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The policy could play a role in addressing a looming succession crunch, as thousands of small-business owners approach retirement without clear plans to transfer ownership. Non-profit Canadian Federation of Independent Business says 76 per cent of those owners plan to exit within a decade.
“Permanence gives owners the opportunity to plan in confidence,” said Justine Janssen, chief executive of Toronto-based Employee Ownership Canada, a national non-profit advocacy group. “It allows people to keep their businesses rooted in their communities and reward the folks who helped build them.”
Ms. Janssen said the temporary nature of the measure had made some business owners hesitant to move ahead with planning. Now that it is permanent, she said, that uncertainty is already lifting.
In EOTs, the money to buy out previous owners typically comes from the company itself. The trust takes on debt to pay out a portion or all of the purchase price. The business then uses its profits to make contributions to the trust, allowing it to repay the debt. That means the model works best for established companies with steady cash flows.
Ottawa paved the way for such deals in June, 2024, when Bill C-59 introduced tax incentives for the trust model.
Canada could see as many as 450 employee-owned companies within seven years, representing about 50,000 workers, according to projections from economist and Columbia Business School professor Brett House, and Toronto-based Social Capital Partners, a non-profit focused on broadening access to wealth and business ownership. By 2031, they predict there will be approximately 100 new employee-owned companies a year.
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In a previous interview with The Globe and Mail, Finance Minister François-Philippe Champagne said that EOTs are a way to help future generations carry their legacy forward.
For young people, “it gives hope, it gives opportunity, and they see possibilities that they have not seen before, to move from being an employee to an owner,” Mr. Champagne said.
Still, the model is not suited to every business. High-growth technology firms, for example, may be better served by stock option plans that allow early employees to benefit from a future sale or public listing. Very small businesses, particularly those with fewer than 10 employees, may also find the trust structure too complex to manage.
Ms. Janssen said for retirees who want to exit their business quickly, this may not be the best option, as the process can be lengthy.
But experts say EOTs could fill a critical gap in succession planning. A 2023 survey by Toronto-based CFIB, which represents about 103,000 members, found fewer than 10 per cent of small businesses have a formal succession plan in place.